If you’re a small business owner, you can take advantage of these tax deductions to lower your taxable income. Some of these include home office expenses, startup costs, and health insurance premiums.
Home Office Expenses
Due to the prevalence of home office expenses, the IRS created a simplified option in 2013 that allows you to take advantage of this deduction. You can now choose between the standard and simplified versions of this deduction. The standard version of this deduction requires you to determine the percentage of your home used for business purposes. You can then apply that percentage to your qualifying expenses, such as mortgage interest, insurance, and utilities. You must keep detailed records of all these expenses. The simplified version of this tax deduction allows you to take a standard deduction of $5 per square foot of your home office space.
Startup Costs
Small business owners can deduct up to $5,000 in startup and organizational expenses. The maximum deduction is reduced if the total costs exceed $50,000. The other half of the deduction must be amortized. Startup costs include the costs associated with establishing and operating a business. On the other hand, organizational expenses include the fees associated with forming a partnership or corporation.
Insurance Premiums
Small business owners can deduct the cost of insurance premiums. These include fire, theft, and accidental damage. Workers compensation, liability, and malpractice are generally deductible, subject to certain criteria. Car insurance is only deductible if the vehicle is used for business. For individuals of a partnership, health insurance policies are generally considered deductible as a guaranteed payment. Health insurance policies for employees of an S corporation are also generally deductible as long-term care insurance policies. However, this deduction must be included in the wages of the employee, and federal income tax is applicable.
Vehicle-Related Expenses
In addition to car insurance, other expenses related to using your vehicle are generally only considered deductible if the car is used for business. To make a case for this deduction, keep detailed records of your business travel. You can also deduct the mileage for using your company’s standard mileage rate. However, this method is only used if the actual expense method is used. You can additionally keep track of all of your car-related expenses, such as gas, registration, and repairs. The percentage of your vehicle’s business use is used to arrive at your deduction. For instance, if you have a total of $2,000 in car-related expenses and you drove your vehicle for business 50 percent of the time, your deduction would be $1,000.
Phone and Internet Expenses
Even if you’re not claiming the home office deduction, you can still deduct expenses related to internet and phone use. This method is only used if the expenses are directly related to your business. For instance, if you have a second line dedicated to your business, you can take advantage of this deduction.
Advertising Expenses
Expenses that are reasonably necessary to promote your business are generally tax-deductible. However, lobbying expenses are not considered tax-deductible.
Travel Expenses
If your travel expenses are generally considered necessary for your business, they can be tax-deductible. This is because they have to take you out of your regular place of business for a significant amount of time, and you have to rest and get enough sleep to perform your duties. To make a case for this deduction, keep track of your business-related expenses, such as lodging, transportation, and non-alcoholic beverages.
Education Expenses
You can also deduct education expenses necessary for maintaining or improving the skills you’re working on for your business. This method is only allowed if the expenses are related to your current line of business.
Retirement Plan Contributions
You can also deduct the contributions that you make to your retirement plans, such as the SIMPLE or the SEP. You can also take advantage of this deduction if you’re a sole proprietor. You can make these contributions for your employees as well.
Self-Employment Taxes
Small business owners and independent contractors pay self-employment taxes, which fund Social Security and Medicare. The total tax rate is 15.3%. Since you are both the employee and the employer of the business, you can deduct the employer’s portion of the self-employment tax when filing your income tax returns.